Soros points a finger of blame for euro's 'existential crisis'

Financial Turmoil in Europe and the United States, by George Soros. (Handout)

George Soros is usually thought of as the man whose hedge fund broke the Bank of England with a $10 billion bet that the pound would lose its peg to other European currencies.

These days, the billionaire investor is seeking to save a currency union, not bury it. In "Financial Turmoil in Europe and the United States," he laments that the euro has become an "existential crisis" for Europe and places much of the blame on Angela Merkel.

The German chancellor's insistence on fiscal discipline amid high unemployment threatens to hurl the euro region into "a vicious deflationary debt trap," he writes in this collection of previously published essays. His warning brings a timely reminder that Greece's latest bailout won't quell the economic and political forces pulling the Old World apart.

"Germany cannot be blamed for wanting a strong currency and a balanced budget," Soros says. "But it can be blamed for imposing its predilection on other countries that have different needs and preferences like Procrustes, who forced other people to lie in his bed and stretched them or cut off their legs to make them fit."

The articles gathered here were written mostly for the Financial Times and The New York Review of Books. Taken together, they constitute what Soros calls "a real-time experiment," his attempt the past four years to influence policies on the fly. The authorities didn't follow his advice, he says, though he surely helped shape the debate.

Soros has called himself "a failed philosopher." He's a rarer species: a pathologist of market linkages and psychology, a man who quickly grasps how an unhealthy growth of credit here will morph into a morbid bubble there. His diagnoses are clear, whether describing commodity index investing or former Treasury Secretary Henry Paulson's flawed plan to purchase distressed mortgage-backed securities.

He tends to propose treatments his patients reject. A prime example is his call to transform the European Financial Stability Facility into a common treasury for the nations that share the euro. That's a nonstarter politically, as is his sensible pitch for joint euro bonds.

European leaders have also rejected a subtler Soros proposal: to have the stability facility insure the European Central Bank against the solvency risk on central bank purchases of new Italian or Spanish bonds from commercial banks. The central bank instead initiated longer-term refinancing operations, which offer lenders three-year loans at 1 percent annual interest.

Bankers view these loans as Europe's answer to quantitative easing. Yet it amounts to a profitable and almost riskless carry trade, as the man with the palindromic surname says. The facility allows Italian and Spanish banks to borrow low to buy their own governments' higher-yielding bonds. It also leaves countries and their banks "hovering on the edge of a potential insolvency," as he wrote in a recent column.

The weakness of this book is that we've heard all this before. Reading these pages reminded me of listening to my father gripe about inflation in the 1970s. Though I knew he was right, I sometimes longed to change the subject.

Six years after the U.S. housing bubble began to burst, economists, journalists and investors keep churning out books about what happened and why. Soros sees the crisis as a continuation of a "super bubble" that began in 1980, when "market fundamentalism became the dominant creed of the world." Yet there are plenty of other time frames and causes to consider.

In a recent paper, economist Andrew Lo of the Massachusetts Institute of Technology compares the expanding canon of crisis literature with Akira Kurosawa's film "Rashomon," the 1950 classic in which various witnesses offer conflicting accounts of an alleged rape and a murder in feudal Japan.

"Only by collecting a diverse and often mutually contradictory set of narratives can we eventually develop a more complete understanding of the crisis," he says in the article, prepared for the Journal of Economic Literature.

Lo reviews 21 books on the crisis, from Paulson's "On the Brink: Inside the Race to Stop the Collapse of the Global Financial System" to Joseph Stiglitz's "Freefall: America, Free Markets, and the Sinking of the World Economy." One of his most disturbing conclusions: "We can't even agree on all the facts," leaving little hope for building "an accurate narrative of the crisis that stands the test of time."

"This is," he writes, "one of the most compelling reasons to read more than one account of the financial crisis and to seek out those books that may not agree with our preconceptions, just in case we've been inadvertently misinformed."